Social Venture Capital

Social venture capital, also known as venture philanthropy, is a term for an active, hands-on form of philanthropy that adopts methods used by traditional venture capitalists. There is no single approach to social venture capitalism as venture philanthropists adopt techniques on a selective basis from traditional venture capital methods; three of these are usually included in any discussion of social venture capital.

First, social venture capitalists, like their traditional counterparts, do extensive due diligence. They think of their actions as investments rather than grants and they are highly selective. They closely evaluate various elements before they invest in a social or charitable organization, including the strength of their management team, the risks they face, and their opportunity to make an impact.

Second, social venture capitalists closely monitor their investment and provide ongoing mentoring and support to the group. Finally, social venture capitalists carefully evaluate an organization’s scalability, or their capacity to grow rapidly to address a particularly widespread social problem.

For example, a venture philanthropist looking at a particular issue—famine in Africa—may provide seed funding to three or four agencies and then judge the success each of these has in dealing with the problem and evaluate which approach shows the greatest potential and progress. Once this evaluation phase is completed, the philanthropist looks to provide much larger amounts of money to the selected agency.

The social venture capital movement is not without criticism. Detractors argue that unlike traditional venture capital where a single measure—money—predominates, the not-for-profit world often has multiple objectives, many of which are dii cult to measure.

They also question whether scalability is realistic in the social context, given that any large organizational ef ort usually involves local governments and therefore cannot grow signii cantly without bureaucratic involvement.

Finally, since the ultimate goal of a venture capital investment is a successful exit, it is not clear whether any parallel exists in the social sector. Social venture capital can also be used as a term for a venture capital firm that includes specific social objectives as goals in addition to seeking a return on capital for its investors.